The United States and China continue to exchange "courtesies." On Thursday, Beijing once again added fuel to the fire, comparing Washington's position with "economic terrorism." Meanwhile, the date of the next Fed meeting is approaching, and the regulator is in an extremely difficult situation due to the escalation of the trade war, which runs the risk of becoming a full-scale one.
The Fed views trade dispute as one of the serious risks to the growth of the US economy. It is becoming increasingly difficult for financial officials to maintain a neutral stance with regard to monetary policy. Judging by the futures on the Fed rate, the markets are now estimating the probability of lower interest rates by 25 bp by September, more than 50%.
If the risks are justified and GDP growth begins to slow, the Fed will have to act more rapidly than in past economic downturns. The fact is that short-term rates are in the historically low range of 2.25% – 2.50%. Before starting to soften the policy, the Central Bank will want to make sure that the rate of growth slowdown exceeds expectations. Evidence of a more serious decline could be reports on the trust of companies and consumers, as well as indicators of costs and hiring.
It is not excluded that the Fed will start to act ahead of schedule, since the trade war may flare up sharply, and the DKP will be set up incorrectly. Officials are closely following the development of trade negotiations between the United States and China, but they do not give an indication, as well as signals about a likely change in policy.
It is worth noting that too frequent changes in rates can lead to negative consequences in the form of increased volatility and uncertainty in the prospects for markets and the economy as a whole. At the same time, there are concerns that the wait-and-see attitude of the American Central Bank is risky.
"The wait-and-see attitude and intention to see strong evidence of weakening activity means that the fed will begin to mitigate too late, returning to the usual manner and forgetting the lessons learned in January, and will create all conditions for another rate cut," experts write.
The Fed meeting was completed on a positive note. Jerome Powell dispelled market expectations about lowering rates this year, stressing that the recent easing of inflation is a temporary factor. However, since that time, there have been some changes. Donald Trump raised import duties on Chinese goods worth $200 billion from 10% to 25%, further heightening the situation. Beijing did not keep it waiting long and delivered retaliatory measures.
At the moment, the rise in global GDP is of concern, while the US economy is balancing between sharply deteriorated indicators and those that are between growth and decline.
Trade and production data indicate a more serious decline in company sentiment and a reduction in capital investment than previously expected. The preliminary index of US industrial production, according to IHS Markit, fell to 50.6 in May from 52.6 in April, reaching the lowest level since September 2009. The index of activity in the services sector fell to a three-year low of 50.9, previously it was at around 53.
What will happen to the dollar?
The dollar against the basket of the main competitors is held near 2-year highs. It is helped by the status of the world reserve currency, which tends to attract attention during periods of market turmoil and political tension. The dollar continues to strengthen, including due to the weakness of the euro, suffering from a new political clash between Italy and the EU and the pound, falling on news regarding Brexit.
On Thursday, the US currency did not seem to notice the revised down GDP for the first quarter and the PCE index, which is closely monitored by the fed in assessing inflation risks.
In the period from January to March, the American economy expanded by 3.1% in terms of annual rates, while previously it was about 3.2%. The PCE climbed 1% – the lowest rate since the fourth quarter of 2015, following a 1.8% increase in the previous quarter. The first estimate indicated an increase of 1.3%.
Experts from Julius Baer believe that the upward trend of the dollar ends. This is due to changes in the US economy in terms of GDP dynamics. America is beginning to lose its advantage over other countries and the growth of the global economy as a whole.
JPMorgan also spoke negatively against the dollar. The bank believes that the Fed will have to soften monetary policy. The escalation of the trade conflict between Beijing and Washington has a negative effect on the economic prospects of the States. It is expected that in the second quarter growth will be only 1%.
